October 30, 2009
The House of Representatives Small Business Committee has proposed
H.R. 3854, the "Small Business Financing and Investment Act of 2009." H.R.
3854 was sponsored by Representatives Schrader (D-OR), Velazquez (D-NY),
Halvorson (D-IL), and Kirkpatrick (D-AZ) and creates, modifies and/or enhances
more than a dozen programs and initiatives designed to stimulate the growth of
U.S. small businesses.
Title VII of HR 3854 (Small Business Early-Stage Investment Program) would
amend the Small Business Investment Act of 1958 to establish the small business
early-stage investment program (the “SBES Program”). The goal of the SBES
Program is “to provide equity investment financing to support early-stage small
businesses in targeted industries.” Any type of entity, including SBIC Funds,
may apply to become a participating investment company or “SBES Fund.” Within 90
days of submission, the SBA Administrator will determine whether to approve the
applicant.[1]
After approval, the SBA Administrator may make one or more grants to the
participating investment company. The grant amount under the SBES Program may
not exceed 100 percent of the private capital raised by the SBES Fund. The
aggregate amount of all grants under the program made to participating
investment companies may not exceed $100 million. The grant amount shall remain
available to draw upon by the company for five years for new investments and 10
years for follow-on investments and management fees. A participating investment
company that receives grant money must make all of its investments in small
businesses, of which at least 50 percent must be early-stage small businesses in
targeted industries and convey a grant interest to the Administrator.[2]
An early-stage small business in a targeted industry refers to a small
business that is domiciled in a state, has not generated gross annual revenues
of $15 million in any of the three previous years, and is primarily engaged in
researching, developing, manufacturing, producing, or bringing to market goods,
products, or services with respect to any of the following business sectors:
- Agriculture Technology,
- Energy Technology,
- Environmental Technology,
- Life Science,
- Information Technology,
- Digital Media,
- Clean Technology, and
- Defense Technology.
Additionally, the manager’s profits interest, payable to the managers of a
participating investment company, can not exceed 20 percent of profits,
exclusive of any profits that may accrue as a result of the capital
contributions of any manager with respect to the company for those receiving
grant monies.[3] Furthermore, a participating investment
company must make all distributions to all investors in cash and “within
reasonable time after exiting investments, including following a public offering
or market sale of underlying investments.”
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any questions regarding these proposed legislative changes, please feel free to
contact your primary attorney at McGuireWoods LLP or the authors.
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NOTES:
1. In making the determination, the Administrator will
consider: (1) the likelihood that the applicant will meet its goals specified in
the business plan, (2) the likelihood that the investments will create or
preserve jobs, (3) the character and fitness of the applicant’s management, (4)
the experience and background of the applicant’s management, (5) the extent that
the applicant will concentrate its investment activities on early-stage small
businesses in targeted industries, (6) the likelihood that the applicant will be
profitable, and (7) the experience of the management of the applicant with
respect to establishing a profitable investment track record.
2. The conveyed grant interest shall contain all the rights
and attributes of other investors attributable to their interest in the
participating investment company, but shall not give control or voting rights to
the Administrator. This interest entitles the Administrator to a pro rata
portion of any distributions made by the participating investment company equal
to the percentage of capital in the company that the grant comprises.
Additionally, the Administrator shall receive the distributions at the same
times and amounts as any other investor in the company with similar interest.
And the investment company shall make allocations of income, gain, loss,
deductions, and credit to the Administrator with respect to the grant of
interest as if the Administrator was an investor.
3. Managers must pay back any excess amount paid to the
managers less taxes paid to the investors and the Administrator. “No manager
profit interest shall be paid prior to the repayment to the investors and the
Administrator of all contributed capital grants made.”